War of Words

Global stockmarkets suffered another month of losses in March, with investors becoming unnerved by the potential fallout of an impending trade war. This has been instigated by President Trump expressing an intention to impose tariffs across a wide range of imports, with China the prime target. Given there tends to be no winners in a trade war, this was universally seen as bad news for global markets.

Although the potential of a trade dispute is unsettling; to put it in context the initial proposals for tariffs on Chinese goods make up around 0.1% of Chinese GDP with even less impact on the US economy from Chinese retaliation measures. Furthermore, like many of Trump’s initiatives, investors will question to what extent it is a war of words and another case of all mouth and no action.

Although we have not seen the levels of market turbulence seen early in February, global equities are showing more elevated levels than witnessed last year. The VIX index, which is the most widely used measure of stockmarket volatility, showed a reading of 20 at the end of the month, which is in line with the long-term historical trend level. Nonetheless, with US policies fuelling investor concerns it is reasonable to expect that 2018 is not going to be a repeat of the smooth rising markets witnessed last year.

Currency continues to influence market returns and, as we have mentioned previously, has become a key focus for us when assessing global markets. In March, the news of a potential Brexit transition agreement saw a rally in the pound versus other major currencies, which saw local currency losses exaggerated in these stockmarkets for UK investors. Despite the recent strengthening of the pound, we continue to extol the virtues of holding well-diversified international exposure given the political uncertainty that threatens the domestic economy.

Away from stockmarkets, reduced concerns of inflationary pressures saw fixed interest prove to be a good defensive hedge from the stockmarket volatility. Defensive Government bonds were sought after as investors quelled their appetite for risk. Commercial property has also proved to be a good diversifier and one of the few areas of asset allocation to generate positive returns so far this year.

Looking ahead, we still believe that interest rate policies at home and overseas will be key drivers of asset prices, whilst currency movements are also going to be key determinants for investor returns as we move through 2018. We continue to believe that, at home and abroad, any interest rate increases are likely to be cursory due to a lack of sustained inflationary pressure and fragile economic growth.

Political uncertainty will continue to weigh on sentiment, with less than 12 months until Brexit, the potential escalation of a global trade war and conflict in the Middle East. Such factors could prove another catalyst for more market jitters. The recent increase in the level of stockmarket volatility is hardly surprising following a prolonged period of unusually steady market rises.

Although, we have seen short-term losses across many areas, looking ahead, a correction could prove healthy for long-term investors, in terms of bringing valuations to less optimistic levels. It also provides a timely reminder that stockmarkets fall as well as rise and for investors not to become complacent or be tempted to take on more risk than they are comfortable with.

Our top down view remains focused on the belief that there is value to be had in equities versus cash and bonds, with a number of areas offering long-term growth prospects and attractive dividends. Whilst a well-diversified portfolio can continue to provide cash beating opportunities in a number of areas for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.

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